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12 ITA-4866/Del/2010 & 41 others

10. The Revenue strongly relies on the decision of Central Economic-Administrative Court of Spain in case number 3604/2006 wherein the issue of taxation of income from software under the tax treaty between Spain and the USA has been adjudicated. In this case the taxpayers had claimed that the computer software had to be regarded as literary work under the tax treaty between Spain and the USA. The Spanish Court gave decision in the favour of the Spanish tax authorities and against the taxpayer. The Court observed that computer software is not expressly included in the definition of royalty in Article 12(3) of the treaty due to rapid development of computer technology in recent years. The court then observed that paragraph 13.1 of the OECD Model commentary 2000 on Article 12 recognizes that there may be difficulties in applying the copyright provisions of Art. 12 to software payments since paragraph 2 requires that Software be classified as a literary, artistic or scientific work, but none of these categories seems entirely apt. Considering the interpretation required by Article 3(2) of the treaty and the amendment in Spanish tax law that recently adopted a definition of royalty (Art. 12 of Non-Resident Income Tax Act (Law 41/1998 of 9 December amended by Law 46/2002 of 8 December, currently Article 13.1) No.3 of Royal Legislative Decree 5/2004), the Administrative Court concluded that payments derived from the use of computer software should not be regarded as literary or scientific work and therefore, such royalties should be taxed as other royalties at a higher rate of 10% and not at 5% as applicable to literary or scientific work. Copy of summary of this decision is submitted.

2. On the facts and in the circumstances of the case, the ld.CIT(A) has erred in directing the AO to withdraw interest u/s 234B by relying upon the decision of Hon'ble Delhi High Court dated 30.08.2010 in the case of DIT Vs Jacob Civil Incorporated, without appreciating that the levy of interest u/s 234B is mandatory as held in the case of CIT Vs Anjum M.H. Ghaswala 252 ITR 1 (SC).

3. The ld.CIT(A) erred in not considering the provisions of explanation 4 of the section 9(1)(vi) of the Income Tax Act, inserted by the Finance Act, 2012 with effect from 01.06.1976, which clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer or all or any right for use or right to use a computer software (including 22 ITA-4866/Del/2010 & 41 others granting of a license) irrespective of the medium through which such right is transferred.